Using the tax relief on a sipp

Banjoblue

Hi folks. I’m over 60 and still working. I’m currently a 40% taxpayer. I’m probably going to retire in 4 years so suspect that that’s too short a period to safely invest in equities or equity based funds. Am I right in thinking that, if I invest in a sipp I’ll get 40% tax relief, so a £10000 investment is worth £14000. When I retire I will be a basic rate taxpayer. So I could then take 25% of the sipp out tax free (£3500) and then if I withdrew the rest I’d pay 20% tax on it. That would be £10500 @ 20% = £2100. Net £8300.  So for an investment of £10000 I could withdraw £11800 after tax? Have I missed something?

molerat

Yes you have. If you pay £10K into a SIPP £2500 will be added from HMRC.  The additional tax will need to be claimed back from HMRC.  You then will be able to take £3125 tax free and £9375 taxable so £7500, giving £10625 but you will receive the benefit of the additional tax earlier. 

dunstonh

Hi folks. I’m over 60 and still working. I’m currently a 40% taxpayer. I’m probably going to retire in 4 years so suspect that that’s too short a period to safely invest in equities or equity based funds.

Your timescale to retirement, if you intended to draw 100% of the value out in 4 years, is too short.   However, if you plan to utilise drawdown, then the timescale on a good chunk of it will be longer.  

Albermarle

If you are employed then presumably you are already paying into a pension and already gaining benefit from 40% tax relief ??
Often it is just as easy,  just to add more to your workplace pension.

Dazed_and_C0nfused

Banjoblue said:

Hi folks. I’m over 60 and still working. I’m currently a 40% taxpayer. I’m probably going to retire in 4 years so suspect that that’s too short a period to safely invest in equities or equity based funds. Am I right in thinking that, if I invest in a sipp I’ll get 40% tax relief, so a £10000 investment is worth £14000. When I retire I will be a basic rate taxpayer. So I could then take 25% of the sipp out tax free (£3500) and then if I withdrew the rest I’d pay 20% tax on it. That would be £10500 @ 20% = £2100. Net £8300.  So for an investment of £10000 I could withdraw £11800 after tax? Have I missed something?

You've worked your figures out all wrong.

If you add £10,000 to a relief at source pension such as a SIPP then basic rate tax relief is added.  So your £10,000 becomes a gross contribution of £12,500.

This gross contribution increases your basic rate tax band so if you are paying higher rate tax on at least £12,500 of your taxable income then it could save you £2,500 in income tax as you would pay 20% instead of 40% on an extra £12,500.

But if you were only paying higher rate tax on say £3,000 then the higher rate tax relief would be limited by that.

Under current rules you could take 25% of the £12,500 as a TFLS with the remaining £9,375 being taxable income.

After basic rate tax the £9,375 is £7,500.

So you start with £10,000 and end up with £10,625 but may also save £2,500 in income tax.

All of the above assumes you are eligible to make a qualifying pension contribution.